The development and distribution of peptidase activity in mucosal homogenates of rat small intestine has been investigated. Substrates used were glycyl-L-leucine (GL), L-seryl-L-methionine (SM), and L-leucyl-glycyl-glycine (LGG). During the first 2 weeks of life there was high peptidase activity toward GL and SM in the distal regions of the small intestine. In the third postnatal week, activity in the distal small intestine toward GL and SM decreased, while activity in the proximal small intestine increased. In contrast, there was no difference in activity toward LGG along the length of the small intestine, nor was there a developmental change. Activity toward all three substrates was not affected by cortisone acetate treatment. However, the classical effect of glucocorticoids on sucrase activity and body weight was observed. All peptidases studied showed maximal activities at neutral pH, indicating that they were not lysosomal in origin. Activity towards GL and SM was predominantly located in the cytosol. It is suggested that these dipeptidase activities play a role in the terminal steps of protein digestion following pinocytosis and lysosomal hydrolysis.